4 Surprising Ways Taxes Can Affect Your Credit

Most people disdain a steep credit card or tax bill, but few
fully appreciate the myriad ways that taxes and credit are
intertwined.

To get a better idea of the
overlap, we talked to Ken Lin, CEO of CreditKarma.com. He provided the following four
examples you'll want to be mindful of:

1. Paying your tax bill late could damage your credit
score.

Just like your electricity and cable bills, falling behind on
your tax payments could drag your credit score down. That's
because the government could file a tax lien against you for
taking too long to pay your bill. Since a
lien is public record, it goes straight to credit reporting
agencies and could stay on your credit report for as many as
seven years, Lin warns. If your bill's too much to handle, be
proactive and work out a repayment plan with the IRS
instead.

2. Paying your taxes with your credit card will cost
you.

"When facing a hefty tax bill, many Americans might be tempted to
pay their taxes with a credit card, if only
to earn the reward points," Lin says. But before you fork over
that plastic, keep in mind that the IRS will charge a processing
fee of anywhere from 1.89% to 2.49% of the payment.

"That means if you owe $10,000 in taxes, paying it on a credit
card would cost you an additional $249 – well above the probable
value of the credit card rewards earned," he notes.

3. Your credit card reward point "gifts" may be
taxable.

Keep in mind that some of those sweet sign-up bonuses and rewards
that credit card companies have been using to bait new customers
may be taxable. It all depends on how they were earned, Lin
says.

"Traditional rewards that are accumulated because of purchases
made with credit cards are tax-exempt," he says. "But rewards
that are not tied to purchases, like cash or miles bonuses for
opening a new account, are taxable as the IRS views them as
'taxable property windfalls.'"

4. You'll pay taxes on your relieved debt.

You might thank your lucky stars if a credit company
decides to write off your debt, but remember that the IRS will
consider that taxable income. "It’s the same way with debt
settlement," Lin says. "The remainder of the debt that you
settled is subject to taxation."